Five Eurosceptic fallacies

I caught a bit of last night's Radio 4 Analysis programme driving home from a meeting, on Euroscepticism in Britain. One speaker (I didn't catch who) suggested that the case for Britain being in the EU was mainly economic - that we could put up with a bit of lost sovereignty because we were being hitched to an economic powerhouse that would do our economy good. This he said, was now clearly nonsense. In evidence he said that the EU used to be 26% on the world economy and now it is 18% (I may have misremembered the numbers). "We are being chained to a corpse." I was apoplectic. But it is typical of the drivel that is being spread across our media. It's worrying that so few people bother to argue back.

Let's clear the decks with some points of general agreement. The Euro is in crisis, and this crisis could lead to an economic disaster. This in some measure results from severe mismanagement of the currency by the EU's leaders, aided by the European Central Bank (ECB). The stock of European institutions is low in public eyes, not just in Britain, but across most of the continent. This has something to do with a democratic deficit - with the institutions wielding power with little apparent democratic consent.

But it is possible to accept all this, and to think that the EU, and even the Euro, is fundamentally a good idea, and that Britain would be mad to consider leaving it. The country may even be forced to join the Euro - though that event is surely a long way off.

Let me try to help the feeble defenders of British membership by elaborating four critical fallacies behind the Eurosceptics' arguments, and fifth that is a bit more arguable.

First fallacy: there is such a thing as "just" a free trade area. It often said the the country joined something that was just a free trade area, but this has morphed into something else. But free trade across borders is a complicated business - and not just a matter of border controls and tariffs. Its implications quickly reach into vast swathes of ordinary life. Most of the US Federal government's powers rest on its right to regulate interstate trade. And the unhappy experience of the North American Free Trade Area (NAFTA) shows how politics gradually undermines transnational free trade projects that do not involve a significant pooling of sovereignty.

Fallacy no 2. Britain is being ripped off by the rest of Europe because we have a trade deficit with them. This leads to the idea that outside Europe we would get a sweetheart deal (like Norway of Switzerland, or at least in popular myth) because they need us more than we need them. But the British trade deficit arises from the chronic mismanagement of the British economy, which led to a prolonged period (since the late 1990s) where the Pound was too high for many of our export businesses to be competitive. This uncompetitive exchange rate has now been reversed, and so our trade balance with the EU will correct. And as for bargaining power, there is a fatal flaw to this line of reasoning: the relative size of the UK against the rest of the EU. EU trade is a major part of our economy; UK trade is not a major part of the EU economy.

Fallacy no. 3. Being outside the EU means that we don't have to comply with EU regulations. This is largely true of the labour market, it has to be said. But far from true of product markets - since we need to sell our products in the EU. Also, if foreign manufacturers are forced to comply with separate British product standards before they can export here, they will either charge us extra or not bother. If you are in any doubt about this ask a Norwegian or Swiss about how much better life is without the burden of EU regulations. You will get a lecture about how they have to comply anyway, without any input into how they are made. This is of particular relevance to one of the areas where Britain has a competitive edge: financial services. Our representatives in Europe are forever batting back ideas for new rules that would disadvantage the City; I wonder what would happen if they weren't there any more?

Fallacy no 4. We would save money by leaving the EU, because we are a net contributor to the EU budget. This is an illusion. We may pay less in net contributions, but we would pay more in tariffs And if we charge more tariffs in return? Any economist will tell you that this is a road to nowhere. Our net contribution is a small price to pay for access, and, besides, some of it helps to develop new markets in the Union's less developed countries.

Fallacy no 5. Britain would have been worse off by joining the Euro at the start. This contention is unprovable, as is the opposite: that we would have been better off in it. The Euro, of course was badly managed. But so was the Pound. While the Euro was going on, the pound shot up in value, destroying many of our exporters and creating a big trade deficit. Borrowing ran amok, as did, to a lesser degree, government expenditure. When it all blew up, it left the British economy in a terrible state, one that it will take many years to recover from. Won't the devaluation of the pound help our recovery? Yes, but it should never have got that high in the first place. What would have happened if we were inside the Euro? Almost certainly no better - except that our problems would have been more transparent, so we might have started to fix them a more quickly. My point: an ugly mess either way. Look at our Eurozone colleagues and the British economic performance does not look stellar. A floating currency is no free lunch.

Of course there is a lot wrong with Europe and the Eurozone. That does not mean that this country is better off outside. The best case for a referendum in this country is that it would force supporters of the Union to make the case more forcefully, and expose the fraud behind the anti-EU case. But on their performance to date, who can be confident of that?

3 thoughts on “Five Eurosceptic fallacies”

I was hoping to read a rather more convincing argument but I can see a few flaws within this article which I’d like to put to the author. For the record, I’m undecided as to whether EU membership is economically beneficial to us.

The EU is undoubtedly a good thing for preserving peace across Europe and Britain should contribute with all other members. But are we paying too much?

I think your 5th point is flawed for the following reasons. The project to tie the British pound to EU exchange rates in the 1990s, using the Deutsche Mark, as part of the Exchange Rate Mechanism (ERM) was a complete failure. The restrictions imposed by the ERM put pressure on the pound, leading to a run on the currency. Whilst this is more related to the Euro currency it nonetheless shows how our manufacturing industry could not keep up with our German competition. Germany have been highly competitive since the 60s, Government policy kept wages low which is why they have not suffered like other Euro-countries. The pound has not been badly managed, indeed it is traded daily and rises/falls according to market forces. The REAL problem
was not the trade deficit, but the deficit as a whole run up by Labour, funding more public service jobs than in anytime in our history.

Gordon Brown was opposed to adopting the Euro, we have that to thank him for. If we were in the Euro, interest rates would be 6 or 7% based on our level of date and with no means to stimulate the economy through Quantitative Easing.

On the subject of economic benefits and drawbacks, we should be using facts and not opinions/spin. How much do the UK contribute on a daily basis? What are the trading trends with the EU? If the UK left the EU how would it affect our individual sectors in the economy? And after subtracting the daily payments made to the EU would the UK be financially better off?

There are a number of factors that cannot be measured of course, democratic rights for one and how we place a value to that. But this is not a simple discussion by any means and requires a more concise, factual debate chaired by an independant spokesperson (maybe David Dimbleby would be a good choice).

Thank you Mayhew. “We should be using facts rather than opinions or spin”. Easier said than done. I could challenge pretty much every single “fact” you have put in your response, which is in any case pretty laden with undishuised opinion. And the facts you ask for to resolve the debate on the Euro are impossible to establish with certainty (“If the UK left the EU how would it affect our individual sectors on the economy?”) And if I multiplied the length of my post by the inclusion of lots of “facts” I doubt I would convince a single sceptic, and not just because nobody would bother to read it. The job I am trying to do is challenge ways of interpreting what we know. In this case the certainty with which people assert that the UK would have been in a worse state if we had not joined the Euro at the start. It’s a real problem in dealing with this issue that so many issues are literally incalculable.

On the specifics I don’t think that the ERM fiasco of the 1990s offers us much evidence either way as to the wisdom or otherwise of us being in the Euro. The problem was that the Germans loosened fiscal policy massively to pay for unification. Actually it was rather a bad time for German competitiveness, and many commentators were gloating that the wheels were coming off the vaunted German model. It took a series of structural reforms in the 2000s, plus some hard collective wage bargaining to restore German fortunes – in a classic (and almost unique) case of the sort of behaviour a single currency was meant to encourage. It’s one of the curiousities of currency systems that loose fiscal policy tends to cause a currency to appreciate – until the debt becomes unsustainable (the Mundell Fleming effect to give it its technical name). That’s what happened to the DM during the ERM – and it is what I think happened to the pound in the 2000s. Being in the Euro would not have stopped Gordon Brown’s follies, but I am trying to suggest that it would have made it more difficult for him.

On the last government’s deficit issues, on the surface the fiscal deficit wasn’t particularly serious – one of the reasons why people like Ed Balls insist to this day that the government was not irresponsible. But it was the trade deficit that was the biggest clue to it being unsustainable. I was studying economics at UCL at the time – our macreconomics lecturer showed us how a high exchange rate and trade deficit meant that fiscal policy was too loose, and the the British miracle was unsustainable – and that was before the bubble burst. The same lecturer, incidentally, was highly critical of the Euro project.